Why has car insurance gone up? How second-hand car costs and new regulations are fuelling price rises

Motorists are seeing a third wave of costs battering their finances - here's why

First it was energy bills, then mortgages. Now, if you are a motorist, there is a third wave battering your finances: car insurance.

Over the last year, the average price of a car policy is up a massive 61 per cent, according to pricing experts Consumer Intelligence, from £900 to £1,449. For those in higher risk categories, such as the young and the elderly, these increases have pushed premiums in some cases to well over £3,000.

There are lots of reasons behind the increase in prices. Firstly, and most obviously, the cost of claims has been rising. Just as the cost of food has been going up, so has the cost of car parts and mechanics – not to mention all the day to day costs of running an insurance business.

Second-hand car values have also been rising as high prices for newer cars has increased demand for used ones. That leaves insurers having to make bigger payouts in the event of cars being stolen or written off.

But there are other less obvious factors at play here too. Firstly, new regulations introduced last year – which ban insurers from charging existing customers more than new ones – have put the squeeze on insurers’ profits.

Several large insurers – including the likes of Royal Sun Alliance and Zurich – have pulled out of the mainstream UK car insurance market altogether. And this reduction in competition has also made it easier for those firms left in the market to push through larger price increases.

But it’s not just price rises that are creating a headache for customers in the car insurance market. There’s also been an explosion of new sub-brands launched onto the market – a practise known as brand stacking. Hastings, for example, now offers quotes under the Hastings Premier, Hastings Direct and Hastings Essentials brands. As well as its core brand, Admiral also now quotes under the Admiral Gold and Admiral Platinum brands.

This has – in my view – been a direct result of the ban on offering different prices to new and existing customers. In the old days, insurers made much of their margin by overcharging their inert loyal customers – while staying competitive on new business rates for the switchers.

Today, however, that’s not allowed. So when customers call up and ask their insurer to sharpen their quote, they’re instead offered a saving by downgrading to a different sub-brand.

The problem here is that the consumer is blinded by choice – and many will struggle to understand the differences between the different tiers of policies.

Twenty years ago, there was pretty much only two main types of car insurance – comprehensive and third party, fire and theft. Today, to compete on price, brands are hollowing out their products – with some of the new tier of essentials policies missing elements that until now have been pretty much universal.

Hastings Essential, for example, doesn’t cover windscreen damage, doesn’t cover damage to your car’s audio visual equipment and doesn’t include any protection to your “no claims discount” if you’re hit by an uninsured driver.

In fairness to Hastings, they do lay these exclusions out in their customer journey. But they are not things that customers will necessarily understand the value of until they need to make a claim for them.

There is also no commonality between the basic, standard and premier levels of cover that most insurers offer. Axa’s basic policy, for example, does still cover windscreens. But it doesn’t offer any cover for lost or stolen car keys – or provide any courtesy car if yours is in the garage after an accident – two things that Hastings Essential does offer.

The combination of sharply rising prices, the hollowing out of products and brand stacking is creating a perfect storm which will inevitably result in a rise in customer misbuying. That’s to say more people will buy policies that don’t meet their needs – to ensure they can continue to afford car insurance at all.

It is surely time that we draw some boundaries around how insurers set prices and some minimum standards around the cover on offer. On the latter, customers should have the choice to build their own package of features – and be given guidance to make the right decisions. And if someone chooses to call their cover comprehensive, perhaps it should need to have a minimum set of covers – so that people can have confidence that policies that use this label truly live up to the name.

As for prices, we need to deal with the fact that more and more people are finding themselves unable to afford insurance at all. Indeed, it’s often the poorest customers who are quoted the highest prices. This might well be because they live in higher risk areas – but surely this is where pooling of risk should be working a bit harder. Alternatively, perhaps it is time to look at social tariffs for the sector – or an exemption from insurance premium tax for low-income customers.

As for now, what can you do if your insurance renewal quote is unaffordable? Well, as ever, use the comparison sites to get yourself a full set of quotes. Don’t leave it to the last minute – as you’ll always be quoted more. Check if there are multiple different ways to classify your occupation – for example, a stay-at-home parent will be quoted less than someone who describes themselves as unemployed. Add a second driver to your policy.

And if you can avoid paying monthly, it’s almost always much cheaper to pay in full upfront. If your credit score is good enough – get yourself a 0 per cent purchases credit card – and use that to buy your insurance. Then stick it in a draw and pay it back over the course of a year.

But when you’re choosing your insurance take extra care to understand what you’re buying and what you’re not. It’s a minefield out there. Tread carefully.

James Daley is the managing director of the consumer group Fairer Finance

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